Quarterly Commodity Outlook

Transcription

1 Quarterly Commodity Outlook Commodity Research 25 January 212 Energy: US natural gas prices are at their lowest point in ten years against a backdrop of stubbornly high unconventional gas production. For now, international gas market developments outside the US could still offer an upward trend in gas US prices. WTI faces continued downward pressure as unconventional oil output remains high but even as throughput leading from the Midwest has improved while Brent maintains its edge over WTI, driven by countervailing forces of eurozone worries and geopolitical risks. Going forward, we expect WTI to face slightly downward path year-on-year while Brent is expected to increase, so maintaining a structural spread. Precious metals: Precious metals have seen a sizable correction in H2-211 and short-term positions have been cut back. ETF positions have only seen a modest correction. With shortterm positions being reduced, this offers room to position again. The largest reduction of positions (short-term) was seen in silver and palladium. The downside in prices seem limited for Q1 as most negative economic news appears to be priced in except for platinum where situation in the eurozone remains crucial. Silver and palladium have a large exposure to the global growth cycle and offer the best cards if the global economic cycle would improve this year. Overall we move back to Neutral and wait for the opportunity to position in silver and palladium. Base metals: The first signs of the downtrend having reached a possible bottom are seen and this could indicate a start of a correction phase higher in the coming months. Nevertheless, upside potential is limited unless global economic fundamentals start pointing in a more positive direction. US data already start to come in better and if these are able to continue, followed by lower tensions regarding the eurozone debt crisis and solid growth in emerging markets (mainly China, India); base metals are set to rally as one of the first commodity categories in 212. Tighter market conditions and emerging market demand, mainly from the construction sector, will prove supportive for base metal prices in 213 and 214. Ferrous metals: From December until February, Australia s Queensland normally witnesses heavy weather conditions. This means severe mining conditions for both iron ore and coking coal. Next to that, the Chinese government announced some easing in monetary policies, which will ease credit restrictions and boost liquidity. In theory, this should be positive for ferrous metals demand and we think there is enough support for stable prices. Steelmaking raw materials prices will stay firm for coming three months. Despite the economic downturn, investments remain high on the agenda for steel mills. Mills have an increased interest in upstream integration; captive (raw materials) production decreases the exposure to price volatility. WTI Brent Natural gas Gold Silver Platinum ABN AMRO Price Outlook Q months view Palladium Aluminium Copper Nickel Zinc Steel (HRC) Iron ore long term view (until 214) Coking coal Agriculture: In 212 production will be on a healthy level for most agriculturals. The weather has a significant impact on production. The end of the La Niña weather phenomenon will give way to more normal production levels after bumper crops in 21/211. Longterm, global consumption will increase, fuelled by a growing population, ongoing urbanization, improving prosperity and a shift in consumption patterns. In the current season, consumption will weaken due to economic developments. Most markets are well-balanced. In H1 212, prices of most agriculturals will remain at high levels, given the tight market undertone, while wheat prices will decline. - Short term: our three month outlook versus spot rate on January 23 rd. - Long term: 214 average forecast price versus 212 forecast price. Grains Coffee Cocoa Sugar decrease by 1% or more decrease between 5% and 9% price movement between -4% and +4% increase between 5% and 9% increase by 1% or more

2 2 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research FORECASTS Q1-212 (1) Energy: Spot rate 23 Jan Average price Q months WTI (USD/barrel) Brent (USD/barrel) Natural gas (USD/mmBtu) Precious metals: - Gold (USD/oz) 1,677 1,682 1,7 1,6 1,4 1,3 - Silver (USD/oz) Platinum (USD/oz) 1,545 1,529 1,35 1, Palladium (USD/oz) Base metals: - Aluminium (USD/t) 2,23 2,93 2,1 2,25 2,55 2,75 Aluminium (USD/lb) Copper (USD/t) 8,353 7,515 8,5 8,6 8,7 8,5 Copper (USD/lb) Nickel (USD/t) 2,261 18,383 2, 2,5 19, 18,5 Nickel (USD/lb) Zinc (USD/t) ,94 2, 2,35 2,5 2,65 Ferrous metals: Zinc (USD/lb) Steel (global, HRC; USD/t) Iron ore (fines, USD/t) Hard coking coal (USD/t) (2) Agricultural: - Wheat (Cts/bu) Coffee (Cts/lb) Cocoa (USD/t) 2,366 2,478 2,4 2, Sugar (Cts/lb) (1) The 3-months forecasts is a Q1 212 exit price. Forecasts for 212, 213 and 214 are average year prices. (2) Prime coking coal Australia,CIF

3 3 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research CONTENTS Macro economic developments Macro Commodity Top-Down Energy WTI Brent Natural Gas Precious metals Gold Silver Platinum Palladium Base metals Aluminium Copper Nickel Zinc Ferrous metals Steel (HRC) Iron ore Coking coal Agriculturals Wheat Coffee Cocoa Sugar Macro-economic indicators Facts & Figures Contributors Analysts and economists

4 4 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Macro Nick Kounis (Head Macro Research, Group Economics) Global cycle seems to be close to bottoming out Euro crisis unresolved, but should be contained eventually setting scene for growth to regain traction later in the year Manufacturing PMI surveys US EZ China ECB: lending and deposits 1, lending deposits Early signs of cyclical trough There are early signs from business surveys that the loss of momentum seen in the global economy is close to an end. The global manufacturing PMI inched up in December, with most big economies experiencing a rise. The US economy was actually stronger in the second half of the year, than the first. A number of temporary drags to growth, including the past rise in oil prices, dissipated. Emerging markets had been on a slowing track, at least until very recently, but the pace of growth remains high. Indeed, China s GDP growth slowed in Q4, but still recorded quarterly annualized growth of 8%, and a year-over-year expansion of 8.9%. The combination of slower global demand, tighter financial conditions and the property market slump with heavy industry particularly affected dampened growth. However, it still very much looks like a soft landing, with surveys as well as hard data gaining their footing at the end of the year. The performance of the US and major emerging markets, underline that there has been a remarkable divergence with the eurozone economy, which looks to have entered a recession. Euro crisis unresolved, but should be contained Financial markets have also entered calmer waters, with risk appetite improving. As well, as the better economic numbers, a key factor has been the ECB s provision of 3-year loans to banks against a wider range of collateral. Although these funds have largely been deposited back at the ECB, the action avoided the credit crunch that appeared to be looming at the start of the year, This has helped to improve sentiment, with demand at recent sovereign bond auctions firming. Still, we are by no means out of the woods yet. A comprehensive package to contain the crisis is still not yet in place. Bank funding strains remain elevated. In addition, next month will be much more challenging in terms of sovereign issuance. There remains a risk that tensions will re-escalate. Still, we judge that policymakers will act decisively eventually. Europe and the IMF need more financial firepower, while the eurozone needs a growth as well as an austerity agenda. Global economy to regain traction later in the year Tighter financial conditions and uncertainty will keep the eurozone economy in recession in the coming months, but credible policy action should lay the foundations for a recovery later in the year. Meanwhile, emerging markets should gain pace during the course of the year, given that the monetary policy cycle is now clearly turning towards easing. US economic growth should continue to hold up. However, it will not be a case of the good times are back again. Fiscal consolidation especially in the eurozone and to a lesser extent the US will restrain economic activity. The US housing market will take time to return to normal. Finally, we do not see emerging market authorities stepping on the gas as aggressively as in 29, reflecting concerns about re-stoking up inflation and financial imbalances. - Earlier than expected policy action - Bigger confidence shock than expected - Further monetary policy stimulus - Sovereign debt crisis spirals out of control - Companies are cash-rich - Policymakers lack of ammunition in advanced economies

5 5 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Commodity Top-Down Georgette Boele (ABN AMRO Private Banking) Back to Neutral More upside potential if the growth outlook and eurozone debt crisis improves But commodity as an asset class remains expensive compared to equities Historical price CRB Index TR/Jefferies CRB Index Dow Jones/WTI ratio Dow Jones / WTI ratio Dow Jones/CRB ratio Dow Jones/CRB ratio Back to Neutral Since 23 September 211 we have been negative in commodities, based on a weak global growth outlook and the risk of position liquidation. We took this position at 33 in the CRB index. It had a volatile ride but in the end a clear direction was missing. There was no lack of direction in individual commodities, however. Metals have been under heavy pressure, as have agriculturals, but energy (mainly crude oil) was able to bounce higher. This has balanced the movements in an index with a larger energy weight. The CRB index appears to be well supported close to 295 and a break in the short term seems unlikely. Bearish growth projections and the eurozone debt crisis notwithstanding, what will be able to push it through this crucial support level? The move back to fundamentals has played out in precious and base metals. But the crude oil market remains driven by the risk premium and a sense of shortage. Outlook for started on a similar tone as 211, with oil prices being driven by geopolitical tensions in the Middle East. The relatively higher oil price will squeeze the margins of other commodity producers because of higher input costs: higher fertilizing costs in the case of agriculturals, higher mining costs in case of gold and higher smelting costs in case of aluminium. Furthermore, high oil prices and Brent out-pricing WTI seem to be the new standard. Economists and analysts have made up their minds that this year it is going to be another difficult one. The eurozone debt crisis will linger on, the US will be paralyzed with the upcoming US presidential elections, China will ease monetary policy in this transition year, but other emerging markets will likely be more careful. Overall, 212 started where 211 ended: with lots of uncertainty. One thing is different though: from time to time market sentiment takes a turn for the better and that is a clear difference compared to the doom and gloom of last year. The surprise factor will be on the upside. Therefore we have moved commodities back to Neutral. Relatively unattractive Our move back to Neutral is one thing, becoming outright bullish is another. We continue to believe that timing, fundamentals, monetary policy and the regulatory environment are not aligned in such way that we are about to see the start of a new bull phase for commodities. But a serious sell-off would be an opportunity to position for a strong recovery. Monetary stimuli will be targeted and more specific and not, as before, unlimited and untargeted leading to waves of liquidity that find their way into commodities. The regulatory overhang has the undesired effect of reducing leverage, something that is not supportive to commodities in general. We continue to hold the view that a strong recovery in sentiment and improved growth prospects will be more supportive to equities than to commodities in general. The Dow Jones (DJ)/CRB ratio, which compares the performance of both indexes, has moved sideways since 29 on a relatively low level. We believe there will be more relative upside for the DJ than for the CRB. - Large supply disruptions - Ample commodity supply - More resilient global growth - Global recession - USD depreciation - Liquidity trap or market panic

6 6 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Energy WTI (West Texas Intermediate) Tim Boon von Ochssée (ABN AMRO Sector & Commodity Research) Hans van Cleef (ABN AMRO Private Banking) WTI increasingly driven by structural changes in US oil production Positive outlook US economy supports current price level The gap between WTI and Brent appears increasingly structural Historical price WTI US oil production( barrels per day) 5,75 5,5 5,25 5, 4,75 4,5 4,25 4, Crude Oil-WTI Spot Cushing U$/BBL Source: Oil Market Intelligence (USD/barrel) 3-month WTI Brent/WTI spread finally came in Over the past few months, the Brent/WTI spread declined significantly for several reasons. WTI prices rose on the back of positive US data, triggering hope of rising future WTI demand. Furthermore, the announcement of a reversal of the Seaway oil pipeline making exports of the record high WTI supplies possible in the course of 212 resulted in a higher premium on WTI oil. Nevertheless, the fact that inventories at Cushing, Oklahoma, are still at record high levels and warm weather conditions fail to boost demand caps the upside. Rebalancing of major commodity indices also added some pressure on WTI, as WTI positions were switched for more Brent exposure. Both Brent and WTI forward curves are in backwardation (spot price > forward prices), which is somewhat strange for WTI, as there is no supply constraint. Support should come from demand side There is a risk of lower demand for WTI now that natural gas is an attractive alternative because of its extremely low price. If the weather also continues to be too warm for the time of the year, demand could strongly disappoint resulting in even higher stocks and more pressure on WTI prices. This may come on top of already announced unconventional oil findings. The delay of the Iranian oil import embargo by the EU by six months will ease the pressure on energy prices somewhat and will therefore keep the Brent/WTI spread around current levels. However, the risk of an increase of this spread remains and could materialize later this year. If US exports finally proceed and US data continue to come in strong, WTI prices could find more support. We expect WTI to trade at USD 1/bbl in the first quarter of 212. Keeping the lid on WTI Mirrored by an expansion of unconventional gas production in the US, unconventional oil production in the US and additional imports from Canada maintain a downward pressure on oil prices in the US up to the end of 212. North America is seen as the strongest source of oil production growth of non-opec countries. Combined with persistently high inventories in the US, this trend helped depress WTI prices over 211. Currently, US oil production is estimated to increase by as much as 8.3m b/d by 216. There is even talk of the US becoming self-sufficient in its oil needs by 22. In essence, WTI is increasingly becoming a less reliable marker for developments on the global oil market (also see the chapter on Brent in this report) as the US move ahead in relative isolation from developments from non-oecd oil markets. That said, the impact on global oil market developments of large increases of US unconventional oil production is one of the bearish price drivers for the longer term: USD1/bbl in 212, USD95/bbl in 213 and USD9/bbl in Markets positioning for economic recovery - Increased production of tight oil in the US - Possible conflict between the West and Iran - Economic malaise in the US as a result also of high fuel prices

7 7 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Energy Brent Tim Boon von Ochssée (ABN AMRO Sector & Commodity Research) Hans van Cleef (ABN AMRO Private Banking) Compared to other commodities, pressure on Brent oil was limited Impact of the Iran issue still limited Brent faces considerable upside potential in the medium- to long-term Historical price Brent Oil price spread Brent-WTI Crude Oil-Brent Dated FOB U$/BBL Oil price spread Brent-WTI US$/BBL (USD/barrel) 3-month Brent Balanced drivers result in range trading In the previous quarter, Brent oil traded within a USD 1 range with an average price of USD 19. Several drivers balanced each other out, but this did not lead to lower volatility. Fundamental drivers (like slower global economic growth, newly found unconventional oil wells) were capped by production disruptions (like in Nigeria after the removal of fuel subsidies) and political tensions (Iran). Especially the tense situation regarding the Iranian nuclear program had a somewhat supportive effect on oil prices. Tensions increased after the EU announced an embargo on Iranian oil imports, after which Iran threatened to close off the Straight of Hormuz, the sea Channel between Iran and Oman, through which about 17 million oil barrels per day (bpd) are shipped. Q1: Three drivers to focus on In the coming quarter, the focus will remain on the three most important drivers. 1) Global economic conditions are likely to remain uncertain. This will have a dampening effect on energy demand and thus caps the upside potential for Brent oil. 2) Stocks could be rebuilt due to a) lower demand, b) new supply from unconventional sources, and c) re-ignition of Libya oil production. This will cap the upside potential as well. 3) The situation in Iran will be closely monitored. The EU announced it will delay the oil import embargo by six months to find alternative oil suppliers and to avoid enhancing the impact of the austerity measures earlier taken. Nevertheless, this could potentially boost oil prices for a short period of time to record high levels. This is not our main scenario, however. We remain neutral and expect Brent oil to trade around USD 11/bbl in Q1. Brent s lead over WTI may well be structural The widening of the Brent-WTI spread, though it has oscillated between USD 5/bbl to values of over USD 2/bbl, appears to be of a structural nature. It reflects the fact that price markers outside the US are beginning to reflect global market circumstances better than WTI. Due to geopolitical developments, Brent will face significant upward pressure this year. Simultaneously, however, the IEA trimmed OECD oil demand outlook for 212, as did OPEC. While non-opec oil supplies are likely to be boosted throughout the forecast period, most notably in the US, forecasts for economic growth point to an improvement for most economies. China and non-oecd countries will continue to play a key role in driving global oil demand growth. We believe that in the medium- to long-term to 214, market circumstances will be such that Brent will remain under upward pressure yoy, barring an unconventional oil production revolution outside the US: USD 15/bbl for 212, USD11 for 213 and USD115/bbl in 214. If US oil production continues to increase as considerably as it currently does, it would be felt on the international oil market. - Situation as a result of EU/US embargo Iran escalate - The EU debt crisis leads to further recessionary pressures - An earlier and stronger-than-expected solution to the EU crisis - Additional non-opec oil supplies roll into the market - Easing fears for US economic soft-patch

8 8 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Energy Natural gas Tim Boon von Ochssée (ABN AMRO Sector & Commodity Research) Hans van Cleef (ABN AMRO Private Banking) Gas prices declined due to unrelenting gas output in the US Historically, prices are at their lowest level in ten years Higher gas prices on the back of large rise in gas consumption outside the US Historical price Natural gas Natural gas and oil prices Natural Gas-Henry Hub $/MMBTU Crude Oil-WTI Spot Cushing U$/BBL Crude Oil-Brent Dated FOB U$/BBL Natural Gas-Henry Hub $/MMBTU (USD/mmBtu) 3-month Natural gas Price declines unexpectedly continued Mild weather conditions, record high inventories and ongoing strong production resulted in a massive drop of natural gas (NatGas) prices to a 28- month low. Over the past few months, the average temperature in the US and Europe was significantly higher than normal. This resulted in a sharp drop of demand (-11% in Europe in 211). At the beginning of January, hedge funds entered short positions for the first time in several months. This led to an acceleration of the price declines, bringing the Henry Hub NatGas spot price below USD Downtrend intact but possible turning point in Q1 Due to the lower demand during the winter season, stocks will be much higher than normal when we enter the Spring season with traditionally lower demand. This could potentially add even more pressure and will also have a dampening effect on commodity indices. Looking ahead, it is hard to say that the bottom has been reached, now that NatGas prices are clearly in a downtrend. Nevertheless, it is getting less likely that this downtrend will hold on for much longer. Refiners are starting to feel the pain of the current low pricing, meaning production should normalize any time soon. Unwinding of the short positions, preferably triggered by stronger US, EU and/or Chinese data, could signal a turning point. We remain Neutral with a Q1 forecast of USD 2.1. We will continue to closely monitor the NatGas market for clues that may justify a change to Overweight in order to benefit from a price correction higher. Gas rebound on the rebound has yet to take place US natural gas prices hit a decade low early 212. US unconventional gas prosecution continues relentlessly, even against the backdrop of low US gas prices. Since 29, gas volumes from LNG projects in various gas-exporting countries have come on-stream, even as the aftermath of the financial and economic crisis unfolded. The US is even set to become a gas-exporter if the current trend persists. That said, though, the year 21 saw the greatest yoy increase in gas consumption worldwide (7.4%) in four decades, a rebound from levels. We believe that while 212 prospects for natural gas prices in the US may be bearish (USD 2.5/mmBtu), and unspectacular for , international gas market developments could provide a slight upside to this forecast. However, the unconventional gas production boom in the US could last for some years and eventually have knock-on effects outside the US, as LNG exports become available. We believe that, at the end the day, a slight rise in Henry Hub prices is likely, up to and including 214, as gas demand increases across the board outweigh the impact of increases in unconventional gas production. - Switching to additional gas-fired power generation - Continued and accelerating unconventional gas output - Extreme weather conditions (long period of cold) - Warm winter in US could lead to lower demand

9 9 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Gold The need for liquidity triggered a sell-off in gold Speculative positions cut back; ETF positions only marginally reduced Lack of alternatives for now so we move back to Neutral Historical price gold and ETF position 2, 1,5 1, Historical Gold/Platinum ratio Gold Bullion LBM U$/Troy Ounce ETF position (USD/oz) 3-month Gold 1,7 1,6 1,4 1, x 1 million gold/platinum ratio Liquidity sell-off After the aggressive sell-off in September 211 gold prices recovered and the rally lasted until the moment that the eurozone debt crisis further deteriorated. Banks got reluctant to lend to each other and this resulted in stress in the money markets, especially for the USD. The major central banks quickly reacted in a coordinated action and opened USD swap lines. This calmed the market somewhat. But the need for USD liquidity remained and banks looked for alternative routes to cover this need. One of them was linked to gold. Banks borrowed gold and swapped it for dollars, thus covering their USD liquidity needs. As a soon as the market picked up on this, gold prices tumbled again. They dropped from USD 1,795 on 8 November 211 to USD 1,524 on 29 December 211, or another 15%. Gold closed the year at USD 1,564, close to our year-end forecast of 1,6. The year average of USD 1,574 also came very close to our 1,545 forecast. Positions reduced Even though gold was sold off, the gold price was resilient compared to the other precious metals and commodities. The lower prices have attracted demand from Asia mainly China and gave several central banks the opportunity to diversify reserves at a relatively attractive level. As we have mentioned in earlier reports, the dynamics of the gold market have changed over time. Where not so long ago jewellery demand was the most dominant driver, this time investor demand is an equally important driver. This has made gold prices far more volatile and less able to fulfil its role as safe haven. Asset investors need to keep this in mind before they en masse buy gold again. In the recent sell-off, speculative positions on the futures markets declined to 29 levels. Total ETF positioning declined as well, but this was relatively modest. These positions could decline further if and when better alternatives present themselves. Lack of alternatives Alternatives to gold appear to be hard to find at the moment. Of the precious metals (jewellery), platinum has not been the expected competitor to white gold. But it could yet become one if platinum prices remain under pressure. Of the commodities, base metals could become more attractive, should the global economic outlook improve. This is not yet the case, so gold is likely to outperform base metals in the short term. Gold is also likely to outperform most major currencies as long as real interest rates remain low and monetary policies accommodative. Gold price volatility remains an important variable to watch. Higher volatility is usually linked to a sell-off and lower volatility to a comfortable trend. Since the end of 211 volatility has diminished, making the case for a recovery in gold prices. The high gold prices have stimulated investments in mining. Lower grade ores have become more attractive and more challenging mining circumstances worth the risk. Total production costs have increased, but the high gold price continues to widely compensate for this. Gold prices remain the most sensitive to demand, of which current variables are more supportive. - More quantitative easing - More optimistic global growth outlook triggering central bank action - Improving investor sentiment - Strong global growth making equities & base metals more attractive - Depreciation USD - Regulatory overhang

10 1 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Silver Liquidity and growth outlook liquidation Opportunity to position for cyclical recovery Keep a close eye on longer-term investment community Silver price and total ETF demand , Bloomberg Historical gold / silver ratio (USD/oz) 3-month Silver Silver Fix LBM Cash USD/Troy ounce Total silver ETF position gold / silver ratio x 1 million Liquidity and growth outlook liquidation The brutal moves seen in September were followed by a period of relative calm in the fourth quarter of 211, when silver prices moved in a 3-35 USD per ounce range. When the overall sentiment deteriorated in December 211, the bottom under silver prices fell out. The silver price dropped from 32.5 to the low 27s, a decline of more than 16.5%. The main reasons for this weakness were the adjustment in the global growth outlook and a liquidity-driven liquidation of positions. From the start of 212, silver prices were able to recover to above the former break-out level of 3 USD per ounce, but the recovery lost pace, as the overall risk sentiment deteriorated again. Our year-end forecast of 28 (27.84 close) and average of 34 for the year (35 in the end) were spot on. Back to Neutral Silver is the precious metal that saw position squaring of short-term investors really materialize. The Commitment of Traders report shows that non-commercial positions on COMEX have been reduced to levels not seen since 23. The total ETF positions have been cut back somewhat but to a relatively limited extent. This means that the large liquidations seen in 211 were mainly driven by the short-term investor community. The long-term community likely will only liquidate if other assets become more attractive. This is also the case for gold. Silver characterizes as being a more volatile gold proxy with a larger leverage to the global growth cycle, due to the large demand from the industrial sector. With the speculative positions being liquidated to this amount and the consensus of economists being negative on the growth outlook, silver may outperform gold as soon as the economic climate improves and the eurozone debt crisis slowly but surely is resolved. What is surprising though, is that market consensus is for a higher silver price, while at the same time it is less upbeat about growth. This can only be if explained if both silver and gold rally higher in a risk averse environment and that is unlikely to happen, as we have seen in 211. A point of attention is the technical outlook. The long-term technical outlook just moved to Neutral and there are some signs that the picture may be changing. It is too early to jump on the silver bandwagon at this point in time though. The longer-term investor community could become nervous and decide to close partly their ETF positions. Should this happen, then a large and brutal sell-off is still in the cards. Such a sell-off would be an opportunity for a cyclical silver rally. We therefore change our rating on silver from Negative to Neutral and wait for the right moment to present itself. - More quantitative easing - Long-term investors abandon positions - More optimistic global growth outlook - Market panic - Depreciation of USD - Global recession

11 11 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Platinum Correction in platinum prices continues Vulnerable to weak demand from eurozone and Japan Chinese jewellery demand crucial to relative performance Historical price Platinum 2,5 2, 1,5 1, Platinum / palladium ratio London Platinum Free Market $/Troy oz platinum / palladium ratio (USD/oz) 3-month Platinum 1,35 1,5 - - Sharp correction In 211, platinum prices moved for most of the year in the 1,7-1,9 range, until a sharp deterioration in risk sentiment triggered by the eurozone debt crisis and downward adjustments in the global growth outlook pushed platinum prices much lower. They moved from a high of USD 1,93 set on 22 August 211 to a low of USD 1,346 (not seen since 29) on 29 December 211, a decline of more than 29%. The direction of our Q4 forecast (USD 1,455 versus real USD 1,41) and the 211 average (USD 1,7 versus 1,721) was spot on. In the sell-off, ETF and speculative positions were liquidated. On 1 January 212 the total outstanding ETF positions in platinum were 1.3 million, much lower than the top but still far above the 21 positions. Speculative positions have not been cut back aggressively in terms of size either. Outlook still grim Recent economic data, especially from the US, were a positive surprise. Furthermore, expectations that monetary easing in China will support commodity demand from that country have supported platinum prices as well. Platinum is mainly driven by demand from the eurozone and Japan; it is used in car catalysts and demand from China, mainly jewellery demand. We expect the economic situation in the eurozone to remain weak this year and therefore demand from this side will be under pressure. Japanese demand could recover if the economic situation in the US improves further and supports demand for Japanese cars. Chinese jewellery demand last year suffered from tightening credit conditions, but this may change once the expected monetary easing measures have been taken. China has been an eager gold importer, benefiting from the lower gold price. We were surprised by the relative weakness of platinum versus gold and palladium. Platinum was clearly less resilient than palladium in an environment of weaker economic growth in the emerging markets. Gold kept its attraction relative to platinum, also because Chinese customers preferred gold to platinum in their jewellery. The gold/platinum ratio is at extreme levels not seen since the 198s. Stronger demand from the eurozone and Japan in a more optimistic growth environment is needed to have the gold/platinum ratio turn around. Although the mining conditions in South Africa remain challenging, we expect a physical surplus in platinum in 212. The situation of oversupply, weak economic prospects in the eurozone and a Chinese preference for gold will likely limit the upward potential for platinum prices. As a result, more of the ETF positions could be closed during this year, especially in the first quarter. - Stronger economic situation in the eurozone - Liquidity trap results in complete scale back of open positions - Supply disruptions - Regulatory overhang that makes investors nervous - Risk seeking environment and/or USD debasement - Global recession

12 12 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Georgette Boele (ABN AMRO Private Banking) Precious metals Palladium Sharp sell-off in palladium Large exposure to the global growth cycle We upgrade palladium to Neutral from Underweight Historical price Palladium ETF data 2,5, 2,, 1,5, 1,, 5, Palladium U$/Troy Ounce ETF palladium (USD/oz) 3-month Palladium Downside materializes The deterioration in investor appetite and the global growth outlook had a negative impact on palladium prices. During the fourth quarter of 212, palladium prices dropped to a low of USD 565 on 4 October 211. This level was almost reached again on 25 November 211. Since then palladium prices have proven to be more resilient than we would have imagined in a market that was worried about the growth prospects of emerging markets as well. Furthermore, it is the precious metals where most of the positions (ETF and speculative) have been reduced aggressively and this process is still going on. The speculative positions reported in the Commitment of Traders report (CFTC) are close to the 28 lows and ETF positions are back on Q1 21 levels. Palladium s resilience since the end of November 211 can be linked to better-than-expected US data, higher total vehicle sales in Brazil and expected monetary easing in China in order to support growth. Our China economist believes that China is on track for a soft landing and will continue its proactive fiscal and accommodative monetary policy (multiple cuts in reserve ratio requirements, but interest rates on hold). Large exposure to the global growth cycle Palladium is the precious metal that is the most exposed to the global growth cycle (especially the industrial cycle), having broad demand from Europe, North America, China and emerging markets. Palladium is used in car catalysts and electrical appliances, hardly in jewellery. It therefore has more characteristics of a base metal than of a precious metal. We expect US and emerging market growth to continue recovering, with a positive impact on demand for vehicles (gasoline). The prospects for palladium prices are therefore much better than for platinum. We expect palladium prices to outperform platinum prices in the first quarter and the platinum/palladium ratio to fall under pressure again. The supply/demand balance of palladium was into surplus in 211, mainly because of the release of Russian stocks. There is always uncertainty surrounding these Russian stocks and this will be no different this year. Mining conditions in the world s second largest supplier South Africa remain challenging. We expect the supply/demand balance to turn into a deficit this year. Furthermore, after the large cut-back in positions in 211, investors may get interested again to invest in palladium, especially if growth proves to be more resilient and positive outside Europe. We therefore upgrade palladium from Underweight to Neutral. - Stronger global economy - Liquidity trap resulting in complete scaling-back of open positions - Supply disruptions - Larger-than-expected supply - Risk seeking environment and/or USD depreciation - Global recession

13 13 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Base metals Aluminium Hans van Cleef (ABN AMRO Private Banking) Casper Burgering (ABN AMRO Sector & Commodity Research) Lower production triggered a price correction higher but downtrend is still intact It will take time before lower production will push record inventory levels down Risk of capacity closures is the highest in Europe and high cost producers will remain at risk Historical price Aluminium 3,5 3, 2,5 2, 1,5 1, Supply, demand & stocks 5, 4, 3, 2, 1, LME-Aluminium 99.7% Cash U$/MT World production (' tonnes) World consumption (' tonnes) Stocks (weeks of consumption), r.axis Source: Metal Bulletin 3-month Aluminium (USD/t) 2,1 2,25 2,55 2,75 Aluminium (USD/lb) Production cuts as prices near cost price The downtrend that started in Q2 211 led to significant declines in aluminium prices. As a result, many major smelters across the globe announced production cuts. We already wrote in our previous Quarterly Commodity Outlook Report that the market price is lower than the cost price. The news about the production cuts resulted in a small price recovery, but is for the moment nothing more than a correction within the longer term downtrend. The short term negative trend was broken and justifies a more neutral stance. The forward curve is in contango meaning that the spot price is below the forward price indicating no shortage in the market. Q1 outlook neutral as drivers are balanced With the longer-term downtrend still being intact, it is too soon to change the neutral outlook of the previous quarter to a more positive stance. For such a shift, the fundamental outlook must change dramatically for the better, or the resistance zone around USD 2,4 should be broken. With the LME inventories breaking higher after having been circling around record high levels for almost 2.5 years, we cannot expect a price rally on supply shortages. It will take some time before lower production will push inventory levels down. Besides a speculative impact on future developments on supply and demand, the fundamentals will therefore have limited effect in the coming quarter. We maintain our neutral outlook due to weak global economic conditions, possible waves of risk aversion based on the lingering worries about the eurozone debt crisis and rising uncertainty about future Chinese demand (based on slightly lower economic growth, deterioration in the construction sector and transition of the political leadership). Aluminium demand on long term to remain solid The global aluminium market will stay in surplus during 212 and stocks are expected to remain at high level. Therefore, we have revised our 212 price forecast down by 1%. Closure of smelters and postponing new projects are the only way to reach some producer discipline, which can bring the market back into balance. The chance of capacity reduction is the highest in Europe and we expect that eurozone production will decline in 212, due to continued macro-economic uncertainty in this region. On a global scale, aluminium production is expected to increase in 212 by 5-6%, with highest production growth rates in China. Demand in Europe will remain weak and we expect moderate growth in the US. In general, the outlook for aluminium consuming sectors in Asia (transport equipment, packaging, construction) remains firm, both on short and on long term, especially China. This will ensure a solid base for demand and we expect price should improve during Other smelters (especially the high cost producers) remain at risk in the forecast period, however, because of high energy prices. - Sentiment on the eurozone improves resulting in risk appetite - Chinese construction continues deterioration / GDP slows to <8% - Significant Chinese smelter cutbacks in output - Further escalation of EU crisis - Increase substitution demand (copper and steel) - New projects entering the market (India, Middle East)

14 14 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Base metals Copper Hans van Cleef (ABN AMRO Private Banking) Casper Burgering (ABN AMRO Sector & Commodity Research) Copper price recovery on signs of improving sentiment; risks remain Price support may continue; eurozone debt crisis and Chinese housing sector cap upside Long-term prices stay on elevated levels, pressure from commissioning of new projects Historical price Copper 12, 1, 8, 6, 4, 2, Supply, demand & stocks 25, 2, 15, 1, 5, LME-Copper, Grade A Cash U$/MT Source: Metal Bulletin 3-month Copper (USD/t) 8,5 8,6 8,7 8,5 Copper (USD/lb) World production (' tonnes) World consumption (' tonnes) Stocks (weeks of consumption), r.axis Chinese imports are high but housing weighs Copper imports by China proved to be very high at the end of 211. The fact that copper prices were relatively low and sentiment on the eurozone improved somewhat pushed prices marginally higher within the USD 7, 9, range. Stronger US data proved supportive, but the main focus clearly remains on Chinese data releases for future demand expectations (mainly the housing and construction sector) and on eurozone debt worries for direction in sentiment. Recent CFTC data suggest that the market is positioned for lower prices already for four months. LME inventories continue to decline. Higher prices in Q1 possible but upside still capped Position unwinding/profit taking by money managers on the back of improved sentiment could result in a short term, upward move. Furthermore, the risk of more strikes for a higher salary remains high, which could potentially hurt production and therefore be supportive to prices. On the other hand, as stated above, the most important driver - the Chinese housing and construction sector - forms a possible risk to future demand expectations and this could cap copper s upside potential. There is a possibility, though, that due to the transition of political leadership in 212, spending will remain highly supported. This could support domestic economic growth. All in all, it is fair to say that the downside risks in copper prices have eased. Nevertheless, although a short-term upward move is possible, the upside potential is limited for the moment, as investors continue to focus on the eurozone debt crisis and the Chinese housing sector. We remain neutral with a positive bias for the time being and will closely monitor the market for positioning for a further recovery during H Price remains elevated, but softens in the long-term Fundamentals will provide some leverage for the price this year, but macroeconomic uncertainty will continue to have a high influence on market developments. Especially economic developments in the eurozone, China and the US are important to monitor. Construction activity in the Western EU remains at low levels in 212, mainly due to continuing (macro-economic) uncertainty. Demand for copper in this region will decline strongly, while demand levels in the Eastern part of the EU are likely to remain firm. The US is expected to register reasonable growth in 212 and copper demand will grow therefore moderately. Our short term copper demand outlook for Asia remains buoyant, especially in China. Therefore, in the near term we expect prices to remain at elevated levels. Although risks have increased, long term construction activity in China is expected to remain at solid levels. The increasing contribution from new projects on refined production over the course of 213 and further should push copper supply into surplus. With strong supply-side increases and higher risks on the demand-side, we forecast that copper price will soften during A solution for EU debt issues - Risk aversion / need for liquidity increases - Chinese economy performs more strongly than forecast - Further escalation of EU crisis and/or cool off Chinese economy - Recovery in construction sectors (US, EU) - Funds scaling back their interest in copper as an asset class

15 15 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Base metals Nickel Hans van Cleef (ABN AMRO Private Banking) Casper Burgering (ABN AMRO Sector & Commodity Research) Downtrend is still intact and forward curve normalized Weak demand is expected for Q1 and with inventories being high, sideways trading is likely We are less confident about long-term fundamental developments Historical price Nickel 6, 5, 4, 3, 2, 1, Supply, demand & stocks 1,8 1,6 1,4 1,2 1, Source: Metal Bulletin 3-month Nickel (USD/t) 2, 2,5 19, 18,5 Nickel (USD/lb) LME-Nickel Cash U$/MT World production (' tonnes) World consumption (' tonnes) Stocks (weeks of consumption), r.axis Nickel is the only base metal still in a downtrend Nickel is the only base metal of which the downtrend, which started mid- 211, is still intact. This is confirmed by the fact that the copper/nickel ratio is still in an uptrend, indicating that copper has relatively outperformed nickel, whereas nickel ratios against aluminium and zinc are moving sideways. The nickel forward curve showed some normalisation over the previous weeks, going from neutral to contango (spot prices below forward prices). This indicates that the pressure from near-term inventories eased as the basis (cash price futures price) turned negative. Weak demand and high inventories in first quarter LME inventories were in a downtrend for most of 211 until last December. A small inventory build-up could even be reported at the start of this year. Chinese inventories were high, due to the higher domestic output in combination with strong imports. Chinese demand is expected to remain weak in the next quarter, based on two arguments: 1) stainless steel producers reported a production cut in reaction to the current low prices, and 2) the metal will be less used as collateral for short-term loans, to be sold later on the domestic market or stored for future loans. Lower demand in combination with high inventories will provide no support for nickel prices. Any upside will therefore only occur if investor sentiment improves and this depends on the Chinese economic growth outlook, strong US data and/or an improvement in eurozone sentiment. This precondition is hardly likely to be fulfilled in the coming weeks, so we therefore maintain our neutral stance with a slightly negative bias. Long-term nickel prices to ease, but will remain high Nickel supply will rise during 212, as a number of key projects are currently in the commissioning stage. Nickel consumption is expected to also increase during 212, but not as strongly as supply. The market will be in surplus (between 2-3% of consumption) this year and this will ultimately have a downward impact on nickel prices. The eurozone debt crisis and slowing economic growth in China will also keep the nickel market depressed this year. Given the weak outlook for consumer confidence and spending, demand for consumer durables (domestic appliances and white goods) will also decrease. We have revised our 212 forecast price downward by USD 1,/t (=5%). We are also less confident about longterm fundamental outlook for the global nickel market in Although end user demand is anticipated to increase steadily over the long term (especially in the BRIC-countries), the prospect of looming nickel oversupply will put downward pressure on prices. If we assume that new projects will become operational according to their current time schedule, nickel prices may drop to around USD 18,5/t in 214. This is certainly a threat to more marginal operations. - Stainless steel expansions exceeding current expectations - Funds scaling back their interest in nickel as an sub asset class - Supply disruptions and delays in pipeline projects - Further escalation of EU crisis and/or cool off Chinese economy - Increase in Chinese imports due to ETF demand - Substitution by stainless steel with lower nickel content

16 16 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Base metals Zinc Hans van Cleef (ABN AMRO Private Banking) Casper Burgering (ABN AMRO Sector & Commodity Research) Zinc traded sideways, market sentiment only having limited impact Neutral view maintained, but a recovery could start as soon as fundamentals turn for the better In 213 and 214, we expect tighter market conditions, supporting prices Historical price Zinc 5, 4, 3, 2, 1, Supply, demand & stocks 14, 12, 1, , 6, 4, 2, LME-SHG Zinc % Cash U$/MT World production (' tonnes) World consumption (' tonnes) Stocks (weeks of consumption), r.axis Source: Metal Bulletin 3-month Zinc (USD/t) 2, 2,35 2,5 2,65 Zinc (USD/lb) Less sensitive to market sentiment Last quarter, zinc prices moved sideways within a relatively small range, compared to the volatile swings in the years before. It seems that zinc is less sensitive to market sentiment than the other base metals. The shortterm downtrend may be broken to the upside; it is still neutral at best. A remarkable move showed in the London Metal Exchange (LME) zinc inventories in December. After having declined significantly in the August November period, inventories recovered 5% in December. Up to mid- January, stocks remained roughly even. The forward curve is showing a normal pattern with contango (spot price < forward) up to the end of 213. Positioned for recovery after the crisis Due to the fact that the zinc market is largely driven by the construction sector, the weak economic conditions continue to weigh on prices. Should the Chinese housing and construction sector also get hurt, prices could decline further. The impact of such a development should not be exaggerated, however, as the Chinese will cut production in such a way, as in 211, output develops in line with demand. Market speculation about slower or flattening demand in the automotive sector in the coming years may already have an impact in the near term, as soon as the first signals show. Although zinc may be less sensitive to market sentiment, developments in China and the eurozone will remain important drivers and lead to short-term, increased volatility. We maintain our neutral view for the coming quarter but keep a close eye on the markets for a possible recovery after the crisis, when demand (expectations) starts to pick up. Leading indicators look encouraging The zinc market remains oversupplied in 212, for the sixth consecutive year. The good news is, however, that the level of oversupply will be significantly lower than in previous years, because we expect consumption to grow at a much faster pace than refined zinc output. In the end, the excess output will be only 1% of total production (in comparison to an average oversupply of 5.3% in the period ). Demand conditions in China and the US will improve sharply. The latest developments in producer sentiment in the US and China are also very encouraging. Leading sentiment indicators in both countries posted an increase in December. Demand for zinc in the EU is expected to decline further in 212. Ongoing weakness in the EU construction sector will continue to damage zinc demand in this region. On the other hand, the outlook for automobile sectors seems somewhat brighter. Demand from China is expected to remain robust. In 213 and 214, we expect some tighter market conditions, which will support prices. Emerging market demand and the construction sectors in this region will be the key drivers in this respect. Higher prices may, however, encourage the commissioning of new production (or mothballed) capacity, subsequently leading refined markets into surplus again. - Demand recovery in major zinc-consuming countries - Sharper weakening of Chinese housing/construction sector - Rising galvanised sheet use in China - Substitution of zinc with aluminium in e.g. automotive die-casting - Increasing raw materials prices and labour costs - Funds cutting their interest if other investments become attractive

17 17 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Casper Burgering (ABN AMRO Sector & Commodity Research) Ferrous metals Steel (global HRC) Demand weakened in practically all the regions of the world and buyers of steel postponed orders Short term macro-economic outlook is not favourable and this keeps steel market sentiment weak Despite the economic downturn, upstream investments remain high on the agenda Historical price Steel 1,2 1, Crude steel production and China PMI (per month) Mt Source: IISI, Thomson Reuters Datastream (USD/t) Steel (HRC, global) Global steel HRC price (USD/t) China steel output (Mt) Steel output, ex China (Mt) China PMI (r.axis) PMI index 3-month Weaker demand and lower steel prices Steel market conditions deteriorated further last quarter on a global scale. Steel mills witnessed continued pressure on prices and in all regions prices declined. In the EU steel price declined fastest by 33% from their peak from March 211, followed by a decline of 27% in Russia/CIS. Long term macroeconomic uncertainty is most probably the most important cause. Demand weakened in practically all the regions of the world and buyers of steel (both traders and steel end-users) are less reluctant to hold on to high volumes of stocks. Due to increased uncertainty on long term developments of macroeconomics, they postponed new orders and have a wait-and-see attitude. The slowdown in demand is the result the sovereign debt crisis in the European economy and a slowdown in China. For the last six months in 211 (until November), Chinese steel output is in a downward trend. This might seem as harmless, but we have not witnessed such a long period of decline in output in China since the beginning of the previous crisis in 28. Headwinds persist, which will soften steel demand The cuts in steel output in China may turn out to be supportive to the steel price; the pace of the price decline slowed. Nevertheless, the short macroeconomic outlook is not favourable and this keeps market sentiment weak. This will weighs heavily on the global steel sector. Especially in the EU region, were demand for steel is not expected to recover very quickly. Low consumer confidence in this region will keep activity in automobile and construction sectors down. On the other hand, EU export markets could improve again on the back of a further weakening of the euro against the dollar. In China and the US, conditions are relatively stable and prospects for steel mills are more positive. Although regional differences remain, we expect that the global steel price will soften further for the next three months, due to higher risks on the demand-side. Uncertainty and more volatility Overcapacity is a structural problem in the global steel industry. But the current economic downturn could turn out to be beneficial for the sector. This is the moment for steel mills to restructure, bring forward maintenance programs and even bring excess capacity down. It will improve cost efficiency (and thus profitable) and it rebalances the market. Volatility in prices for raw materials increased significantly, however, because of the changes in raw material pricing systems. In response, an increasing number of steel mills have implemented price risk management in order to be less exposed to the increased price volatility. Despite the economic downturn, investments remain high on the agenda. Steel mills have an increased interest in upstream integration; captive (raw materials) production decreases the exposure to persistent price volatility. We expect that investment activity by steel mills in both domestic and overseas mining projects will increase further in coming years. We expect price to remain relatively strong in the forecast period. - Strong steel demand from key sectors in EU, US - Strong decline in construction activity in China - Permanent shut-down of Chinese capacity (small mills) - Escalation of EU crisis and/or strong cool off Chinese economy - Continued oversupply of steel and limited producer discipline

18 18 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Casper Burgering (ABN AMRO Sector & Commodity Research) Ferrous metals Iron ore (fines) Wet season in Australia hampers loading of iron ore Enough support for stable prices in the coming three months Despite concerns about oversupply, iron ore demand will remain stable on the long term Historical price Iron ore (fines) World iron ore & steel production per year ( tonnes) 2,5 2, 1,5 1, Steel China Iron Ore Fines U$/MT e Source: IISI, UNCTAD, ABN AMRO (USD/t) 3-month Iron ore (fines) China crude steel production RoW crude steel production Iron ore production Iron ore price declined on weak demand Iron ore price tumbled almost 23% since its peak level of September 211. Currently, prices move in the range of USD /t. The strong decline in prices makes buyers and physical traders in iron ore reluctant to order new material. They seem to be waiting for even lower prices, but weak demand is the main reason for price decline. There are also problems on the supplyside. The so-called wet season in Australia (from December-February), has forced some producers to suspend loading of iron ore. Also, Brazilian Vale declared force majeure on output from some of its iron ore mines, due to flooding. However, these worldwide problems with supply have limited effect on prices. In historical perspective iron ore price remained on high level. India raises export duties, short term prices stay firm On the short term, ore demand remains subdued and there is abundant supply. Steel demand in practically all the regions in the world is weak and this is not expected to change soon. There are worries in the iron ore market over Chinese steel output. Chinese steel production has been in a downtrend over the last 6 months and declined by 1% y-o-y in November. However, we expect that prior to the festive season (1 week, staring on the 23 rd of January), steel producers anticipate by increasing steel output and stock building in December and January, in order to be able to meet steel demand. Besides that, the Chinese government announced some easing in monetary policies, which will ease credit restrictions and boost liquidity. In theory, this should be positive for metals demand. Also, India (world s third largest supplier) announced an increase of export duties, which reduces international iron ore availability. In short, there is enough support for stable prices and we expect prices to stay firm for coming three months. Long term price will soften slowly Capacity is expected to increase significantly on the long term. With many new projects in the pipeline, overcapacity is looming. But many expansion plans are considered to be flexible, meaning that whenever market conditions are not favourable, new projects can be postponed. Despite concerns about oversupply, many market participants seem confident that iron ore demand will remain stable. Therefore, we expect that prices will stay relatively high in historic perspective, but will ease during the forecast period. A weak steel market caused Chinese mills to withdraw from the spot market, although we think this is only temporarily. China will remain an important consumer of iron ore and is expected to continue to source high volumes of the steel making raw materials in the forecast period. Quality issues and the high costs of domestic production, in combination with the planned construction and infrastructure projects mentioned in the 12 th Five Year Plan, support this view. However, high costs of production are a millstone around the neck of many Chinese iron ore miners and they are very vulnerable to volatile and low prices. - Infrastructural problems, unfavourable weather conditions - Strong decline steel demand by end users (e.g. construction China) - Strong increase in (real) iron ore demand - Escalation of EU crisis and/or strong cool off Chinese economy - Expansion of government policies limiting total exports - Shut-down of steel capacity (small mills in China)

19 19 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Casper Burgering (ABN AMRO Sector & Commodity Research) Ferrous metals Hard coking coal Until November, South Korea increased its coking coal import volume by 18.4% Buyers of coking coal have become less active and are wary for future price declines Supply disruptions due to weather conditions in Australia keeps the market tight Historical price Hard coking coal Source: Metal Bulletin, Thomson Reuters Datastream Regional hard coking coal import ' tonnes Source: Clarksons SIN (USD/t) Hard coking coal Aus. Hard Coking spot price (USD/t; fob) 7, 6, 5, 4, 3, 2, 1, Japan Coking Coal Imports South Korea Coking Coal Imports China Coking Coal Imports 3-month Import volume into China reaches record levels Despite the fact that Chinese coking coal import reached its 211 record level, imported volumes until November were down 5.2% in comparison to the same period in 21. The record level of 5.1 million tonnes was reached on the back of the decrease in international coking coal prices. Chinese steel production increased by 1% until November, and this means that China sourced the majority of its coking coal domestically. Mongolia is still the biggest supplier to China, with a share of almost 45% in total import volume. Japan also decreased its coking coal imports in this period by 5.7%, while South Korea increased its volume by 18.4%. South Korea is a net importer of coking coal. Therefore any increase in domestic steel production is accompanied by an increase in imported coking coal. South Korea steel production grew by an impressive 18% y-o-y until November, the highest growth rate in 211 of all steel producing countries. Short-term coking coal prices will stay firm Hard coking coal prices have been decreasing since the 211 high in April (of USD 32/t) and have lost almost 34% until now. This is mainly due to a slowdown in steel markets worldwide. We have therefore cut our short-term price outlook. Demand conditions for Japan s steel industry remain weak and from the latest data we also see further weakening in China s steel production. South Korea is the odd one out. Given the strong growth of South Korean steel production last year and the positive outlook for steel demand, import volume of coking coal will stay on high level. Today, buyers of coking coal have become less active and they are wary for high stocks with current price declines. However, price shocks due to supply disruptions are common. The first quarter can be characterized by severe mining conditions for major coking coal mining regions. From December until February, Australia s Queensland normally witnesses heavy weather conditions. This period has the highest rainfall, and sees the occasional tropical cyclones. If the wet season has the same impact as it did in January 211, the coking coal market will become tight again. Long-term prices softens, but high levels remain Domestic Chinese supply of coking coal will encounter further difficulties due to the closure of many small (because of unsafe and environmentally unfriendly) coking coal mines and the high domestic coal price. On the long term, ongoing industrialisation, urbanisation and economic development of China will provide a solid base for steel demand and for steel making raw materials, such as coking coal. Therefore, China will continue to play an increasing role in the international coking coal market. Price remains an important criterion. At high prices, new mining projects are being developed and will enter the international coal market in the long term. We expect that, in the current tight market conditions, this will bring some relieve on the S/Dbalance. Therefore, we assume that in international coking coal prices will soften. - Supply problems (due to weather) in major coal supplying countries - Strong decline steel demand by end users (e.g. construction China) - Other coal supply difficulties (strikes, export limits, etc.) - Escalation of EU crisis and/or strong cool off Chinese economy - Governments coal stockpiling strategies - Steel mills switching to (cheaper) alternatives (PCI)

20 2 Quarterly Commodity Outlook 25 January 212 ABN AMRO Commodity Research Thijs Pons (ABN AMRO Sector & Commodity Research) Agriculturals Wheat Production to increase to record highs in 211/212 Demand remains firm given tight corn market supply Wheat market is well-balanced Historical price Wheat 1,2 1, Wheat production and consumption x 1 million tonnes /4 27/8 211/12 Source: IGC Wheat, No.2 Hard (Kansas) Cts/Bu Production (Cts/bu) 3-month Wheat Consumption Russia and Black Sea region back on export market In 21/211, global wheat production decreased by 3.8% to million tonnes. A severe drought slashed yields in the CIS. This year, the global wheat production is likely to recover and may reach a record high of million tonnes. The increased production is the result of the 1.4% rise in production area worldwide and the above-average yields due to good weather conditions. Analysts forecast a production increase in Russia of 35% to 56.2 million tonnes, 33% to 22.4 million tonnes in the Ukraine and 1% to 2. million tonnes in Kazakhstan. They expect yields in Russia above the five-year average. US production, on the other hand, is declining to 54.4 million tonnes due to decreasing planting areas and declining yields. Production in the Southern Hemisphere will decline by 1.7%. Recently harvested crops were better than expected 3 months before. The global wheat market is amply supplied. In 21/211, wheat demand remained firm despite the high prices. Wheat consumption increased by.6% to million tonnes. Carry-over stocks declined by 3.3 million tonnes to million tonnes, equal to 19 days consumption. Wheat prices were high last year due to the production deficit, declining global stocks and the Russian export ban. This ban was lifted on July 1 st 211 and Russia returned to the wheat export market. In Q4 211, wheat prices declined due to wide availability on the export market. Corn will support wheat prices In 211/212, global wheat consumption will increase. Global demand for food will grow modestly, fuelled by a growing population, urbanisation and improving prosperity. The use of wheat for animal feed will grow given the large global availability of low/medium grade wheat, the tight market supply of corn, and the increasing demand for livestock feed. The use of wheat in animal feed is at the highest level in 21 years. Industrial use of wheat will increase due to the increasing use of starch and renewable energy. Sustained fears about the global economy could decrease global wheat consumption. The production area worldwide is forecast to increase 1.7% to million hectares this year. Most of the increase will be in Russia, the US and Canada. Longer term, production in Russia will increase due to the availability of arable land, higher use of for example fertilizers and herbicides, and improved seed. Reviewing the supply/demand ratio, global wheat stocks will increase to a near-record at the end of the 211/212 season. China holds about 3% of worldwide wheat stocks, which are not free available on the world market. The market is well-balanced. In the fourth quarter of 211 and the first half of 212, the corn market will support wheat prices. Wheat remains an attractive alternative animal feed. Prices will decrease given the growing confidence that global wheat supply will be ample in 211/ Production risks due to adverse weather in production areas - Impact of a slowing global economy - Strong demand for wheat-based animal feed - Export competition of lower cost wheat from the Black Sea region